Pivotal Events

The following is part of Pivotal Events that was
published for our subscribers June 5, 2008.

SIGNS OF THE TIMES:

Last Year:

"Growing Demand May Limit Supply for Poor Countries"

"The ethanol boom in the US is likely to limit corn's availability
for food and feed use."

- Wall Street Journal, January 16, 2007

The conclusions were from a study from Earth Policy Institute, which was
an accurate call.

Then in early June, the first Bear Stearns disaster was discovered and the
cheerleaders cranked up the good news:

"The subprime slump is contained"

- Bloomberg, June 26, 2007

The statement was from Freddie Mac, the number 2 mortgage finance company.

"The subprime mess has been basically looked over and not taken as
a big concern."

- That was part of the Bloomberg article and its worth reviewing some sub-prime
mortgage bond prices: The BBB, which had rebounded to 84.15 on May 8 (last
year), declined to 82.68 on June 1 and then plunged to 42.32 in August as
that panic concluded.

* * * * *

This Year:

After the March debacle, investor spirits soared into mid May and the street
celebrated:

"The Federal Reserve has brought the markets back from the brink of
disaster", which was recorded by the Wall Street Journal on May
23.

But as we have been noting, sub-primers have been foreshadowing another
problem. Since the middle of April, the BBB which had slumped from 10.96
to 6.52 on Friday is now at 4.92 (no typo).

Stock Markets: The crash in the BBB sub-prime from 84 a year ago to
less than 5 is a horrendous drop in price - and it is not limited to this one
ranking but represents all similar confections, otherwise known as "securities".
The loss of market cap is in the trillions of dollars and represents a massive
contraction of credit.

This, of course, links to the stock market as the world of investing thrives
on credit expansion and, so far, has been bewildered by the dislocations. But,
as we have been noting there is much more to the stock markets than earnings,
valuations and boasts about the abilities of the Fed.

By last July, the change in the credit markets was sufficient to conclude
that the greatest train wreck in history had started. The link to the stock
market has been most conveniently represented by the course of sub-prime bond
prices.

The initial warning on each slump has been the lengthy decline in lower-grade
sub-prime and the condition becomes acute when the higher-ranked break down.
This week both the AA and A took out the lows with the March panic. This is
a fully-fledged warning on the next slide in the stock markets.

Further discoveries of bad lending will be reported during a weakening stock
market.

Most sectors could be vulnerable.

After some firming banks and financials became vulnerable to their two nemeses
- deteriorating credit conditions and announcements of banking disasters already
committed.

The BKX rallied to 88.7 on May 1 and a few weeks ago, we noted that taking
out 74 would resume the downtrend. Also noted was the change in the sub-prime,
which would eventually force the breakdown. Today's low was 71.9.

The pendulum with banks on one side and resource stocks on the other side
continues, with banks down since May 1 and miners (SPTMN) up since that date.
Of interest is that today bankers and miners were both down.

Base metal prices are back to their lows of December, which suggests the miners
should be around 700, rather than at the current 860. Last week's high was
894 and the cyclical high was 958 in October.

We like to play the seasonal rally and the best is likely in and we are essentially
out of the play. Traders could begin to play the short side.

INTEREST RATES

The Long Bond: Last week minor support at 114 was taken out on a drop
to 113.41. Yesterday, this was tested and the bond closed at 114.98.

Some of the recovery seemed due to the heavy stock market, which has become
the knee-jerk move. Last week, we noted that the bond may becoming more vulnerable
to deteriorating liquidity in lesser-quality issues.

The recovery is from a level not oversold enough to prompt a technical rally.
There is overhead resistance at 116--chart plus some moving averages.

It is possible that this could occur in the next phase of the contraction
when treasury-bill rates would be declining. Traders have been positioned for
steepening. The curve flattened into mid May with the 30-year to 3-months coming
into 263 bps. This is now out to 286 bps - no big deal, but it could be equivalent
to the change last May.

Credit Spreads: With the revival of the "good stuff" out of the March
panic, spreads were likely to narrow into May. Then, the seasonal turn could
push spreads to severe dislocations by later in the year.

We played this very well in 1998 when LTCM was hit by positioning for narrowing
on the grand Euroland scheme that under a common central bank and currency,
spreads between most European countries would narrow to next to nothing. LTCM
leverage the "convergence" as it was called to the hilt and our view in May
of 1998 was that spreads would widen to dislocating conditions by August and
September - which was the case.

This seasonal turn to widening will be profound with severe dislocations occurring
in many countries. Also, as the boom ends politics could change from authoritarian
during the boom to a shift towards the individual, and regionalism.

European financial cohesion could fly apart making the attempt to have the
euro trade like the mark seem doubtful.

Gold Sector: For this year we rode the rally into March with the understanding
that when the gold/silver ratio turned against silver the action was within
two weeks of an important top. The ratio turned on March 6 and the high for
both metals was on March 17. That also signaled that senior gold stocks would
decline by more than 20% into the first part of May. This happened.

Then, in early May the advice was to get positioned for an intermediate rally,
with the understanding that sometime in May crude could conclude its spike
and reverse. This would provide another buying opportunity.

The HUI declined to 385 in early May and rebounded to 459. The correction
has been to 412 and there seems to be support at 410, which could take some
time to build a base.

On the fundamental side, the next financial crisis will increase the investment
demand for the unique liquidity of gold.

This could be showing up with the resumption of the uptrend in gold's real
price. Our Gold/Commodities Index set its last high at 230 in the January panic.
Then with the revival of the "good times" the index declined to 194 in early
May. The initial increase made it to 215 on Thursday and Friday, from which
it has slipped to 210.

Gold's real price typically increases though a post-bubble contraction and
we think that the current uptrend has a couple of years to go.

"The budget should be balanced, the treasury should be refilled, and
the public debt should be reduced. The arrogance of officialdom should
be tempered and controlled. And the assistance to foreign lands should
be curtailed lest we become bankrupt."

The opinions in this report are solely those of the author.
The information herein was obtained from various sources; however we do not
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